Twenty years down the road

Toyota may be about to join the ranks of America's Big Three car makers

TWENTY years ago, the finishing touches were being added to the first Honda cars to roll off the production line at the first Japanese car plant in North America, in Marysville, Ohio. The Japanese manufacturer was there in response to taunts by a Ford chairman, Harold “Red” Poling, that the Japanese should “build cars where they sell them”. In the protectionist mood of the times, the only way Japan's car companies could get round import restrictions was to invest directly in America. Honda, which already had motorcycle production there, was the first, followed over the next four years by Nissan and then Toyota.

The first of millions

So successful have their cars been since then that Toyota is now poised to replace Chrysler as number three in the American car market, with over two-thirds of its sales manufactured locally. Until American manufacturers rolled out interest-free finance schemes in desperation in September 2001, Toyota had looked like overtaking Chrysler, the weakest of Detroit's Big Three. Yet, only two years earlier, Chrysler's market share had been almost 1.5 times that of Toyota.

“Toyota's market share goes up during downturns,” says Yukitoshi Funo, head of the company's North American operations. Sure enough, its American car sales in the first eight months of this year rose by 4.6% over the same period in 2001, in contrast to declines at Ford and Chrysler. This rate made Toyota's president, Fujio Cho, speculate in New York last week that the company may soon “be in need of another plant” in North America, its fifth, to meet its sales target there of 2m units by 2004.

All three top Japanese manufacturers have ambitious plans to increase their global sales over the next few years, and they see America as the most promising place to grow. It is also where they make well over half their profits, their home market being flat and their European plants still loss-making. Whereas General Motors (GM) makes only about $330 in profit per car, Toyota and Nissan make around $1,000, and Honda over $1,600.

Before the Japanese set up in America, people like Mr Poling thought the secret of their efficient car-making was superhuman labourers working like crazy on the assembly lines back home. So it was a big surprise to complacent American manufacturers when Honda started making cars equally efficiently, using American workers on American soil. Of course, the Japanese were careful to steer well clear of the Detroit area, so avoiding the clutches of the United Auto Workers (UAW) union and its then resistance to modern manufacturing methods. The most efficient car factory in the world is Nissan's plant in Smyrna, Tennessee, where the UAW lost heavily in a recent vote to represent workers.

American consumers soon learned that the real secret of Japanese success was that the manufacturers concentrated on such basics as product quality, inventory control and market research. This is still working to their advantage. Durability and economy matter when times are hard (and fuel prices are rising), since penny-pinching consumers look for cars that wear well and are frugal. Improved servicing facilities have also boosted sales. A reputation for reliability brings other benefits. Second-hand Toyota Corollas and Honda Accords sell at higher prices than comparable cars made in Detroit. One study showed that GM-marqued cars rolling off its joint plant with Toyota in California were worth less after a few years than identical cars with Toyota badges.

Toyota and Honda have maintained their advantage in other ways. Unlike their American rivals, they have set tight limits on fleet sales to car-rental companies; consequently, their used-car markets are not flooded with car-hire cast-offs. They have also avoided the huge financial incentives that most American car companies now shower on their customers.

Toyota has worked hard at staying close to its dealers. High-level executives visiting from Japan often make a point of calling on dealerships to chat with salesmen. When car sales began falling in 2000, Toyota soon heard from unhappy salesmen that stocks of unsold cars were starting to build up, and it hastily reduced production. American car companies were slower to respond.

Steve Usher, a car-industry analyst at J.P. Morgan in Tokyo, says that another reason why Toyota and Honda have done well is that they have grown up with America's baby-boomers. Japanese cars entered the market in the 1960s and 1970s, when Detroit was still concentrating on building powerful engines rather than raising overall quality. As new entrants, they offered smaller, cheaper, more fuel-efficient vehicles that appealed to the (then) young. As that generation grew older and richer, the Japanese car makers followed them by moving into the luxury end of the market, with brands such as Lexus and Infiniti.

Now that they make light trucks, such as pick-ups and sport-utility vehicles, in America as well, the Japanese have increased to 20% their share of that part of the market (Detroit's last redoubt through the 1990s). Mr Usher thinks they may soon match their one-third share of the saloon-car market.

But the Japanese cannot afford to be complacent. The Indiana factory shared between two smaller Japanese car makers, Isuzu and Subaru, has stopped production because of weak sales. Even Toyota has made mistakes. The T100, initially a big flop, took off only after the company completely overhauled the truck and re-launched it as the popular Tundra; but it is once again under pressure from rivals. European companies are also increasing their North American production: Mercedes is expanding in Alabama, and Volkswagen is considering adding a United States plant to its facilities in Mexico because sales have rocketed since the new Beetle was launched five years ago.

All this means that the Japanese have little room to make mistakes. Being bigger, Toyota can afford to run more risks than Honda. But it is vulnerable to the fact that, although its cars delight and its factories astound, its management remains distinctly old-fashioned and Japanese.